Solution Chapter 18

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SOLUTIONS TO EXERCISES
EXERCISE 18-1 (15-20 minutes)

(a) Huish could recognize revenue at the point of sale based upon the time of shipment because the books are sold f.o.b. shipping point. Because of the return policy one might argue in favor of the cash collection basis. Because the returns can be estimated, one could argue for shipping point less estimated returns.

(b) Based on the available information and lack of any information indicating that any of the criteria in FASB Statement No. 48 were not met, the correct treatment is to report revenue at the time of shipment as the gross amount less the 12% normal return factor. This is supported by the legal test of transfer of title and the criteria in FASB No. 48. One could be very conservative and use the 30% maximum return allowance.

(c) July Sale Entry.

Accounts Receivable 16,000,000 Allowance for Returns 1,920,000 ($16,000,000 X 12%) Sales Revenue—Texts 14,080,000

(d) October Collection.

Cash 14,000,000 Sales Revenue—Texts* 80,000 Allowance for Returns 1,920,000 Accounts Receivable 16,000,000

*A debit to either Sales Revenue—Texts or Sales Returns could be made here.

EXERCISE 18-2 (15-20 minutes)

(a) 1. 6/3 Accounts Receivable—Kim Rhode 5,000 Sales 5,000

6/5 Sales Returns and Allowances 400 Accounts Receivable—Kim Rhode 400

6/7 Transportation-Out 24 Cash 24

6/12 Cash 4,508 Sales Discounts (2% X $4,600) 92 Accounts Receivable—Kim Rhode 4,600

2. 6/3 Accounts Receivable—Kim Rhode 4,900 Sales [$5,000 – (2% X 5,000)] 4,900

6/5 Sales Returns and Allowances 392 Accounts Receivable—Kim Rhode 392 [$400 – (2% x $400)]

6/7 Transportation-Out 24 Cash 24

6/12 Cash 4,508 Accounts Receivable—Kim Rhode 4,508

(b) 8/5 Cash 4,600 Accounts Receivable—Kim Rhode 4,508 Sales Discounts Forfeited 92 (2% X $4,600)